Allianz weighs up pounds 9bn offer for Royal & Sun

ALLIANZ, the German insurance giant, is seriously considering a pounds 9bn cash offer for Royal and SunAlliance, the UK insurer, in a pre- emptive move to prevent the group falling into the hands of UK rival CGU.

CGU, the composite insurer headed by the well-regarded Australian Bob Scott, is currently debating whether to mount a cash and shares bid for RSA after being rebuffed in an attempt to engineer a no-premium merger four months ago.

RSA, which is advised by Rothschild, has had its defence team in place for some time in anticipation of a potential hostile bid.

Allianz, which has long been keen to expand its UK operations, is weighing whether tactically it should wait for CGU to make the first move and precipitate an auction or strike now with a knock-out bid that could possibly shut CGU out of the game altogether.

Allianz was one of the losers in the bidding for Guardian Royal Exchange which fell to a pounds 3.5bn bid from Axa, its French rival and sponsor of football's FA Cup earlier this year.

The threat of an Allianz bid may be one of the factors holding CGU back. Having seen how Royal & SunAlliance had effectively put itself in play with its ill-judged tilt at GRE, Bob Scott is well aware that he cannot afford for CGU to bid against a group of Allianz's size and lose.

Allianz has a market capitalisation of 71 billion euros (pounds 46bn) dwarfing CGU, Britain's largest composite insurer, which weighs in at pounds 12bn.

Given its size, and its high market rating, Allianz would have little difficulty raising the money to fund a cash bid for the UK group. Last year, after Allianz mopped up French insurer AGF, Goldman Sachs was able to place $1bn of stock for the group in just one day, and bankers say that there is a strong appetite abroad for the group's shares.

The group, which is based in Munich and headed by chief executive Henning Schulte-Noel, has in the past been reluctant to get involved in messy situations.

However, the group has been seeking to shed its former image as a stodgy German insurer by adopting a more aggressive acquisition strategy and moving towards a more Anglo-Saxon style of corporate governance and transparency.

"They have come a long way from where they were a couple of years ago when they published results annually and that was it," said one banker who is close to the group.

Allianz recently put in place an ambitious executive share option scheme linking boardroom performance to the group's share price for the first time.

Moreover, having largely fulfilled its strategic goals in neighbouring France and Italy, Allianz's board is increasingly focusing on the problem of what to do about the UK, where its existing operation, Cornhill, is too small for a group of its size.

With GRE gone, RSA is one of the few avenues left for the German group to fulfil its strategic goals in the UK.

One question will be how Axa reacts; through Sun Life and Provincial, it already owns a significant chunk of UK insurance assets. The group will be reluctant to stand by and let one of its most dangerous competitors break into the UK. However, the group is still digesting the GRE takeover, and is not thought to be in anything like the position to move on another target so soon.